Addressing Business Litigation through Bankruptcy

If you are running a business and are being sued, filing bankruptcy may well help you. It may help whether you are closing the business or want to keep it operating.

If you are closing the business, most of the time filing a Chapter 7 “straight bankruptcy” will stop the lawsuit and will discharge (legally write-off) any related debt, and do so permanently.

If instead you want to keep the business operating, often filing a Chapter 13 “adjustment of debts” will stop the lawsuit and deal sensibly with any related debt.

Business Litigation “Stayed” by Either a Chapter 7 or Chapter 13 Case

A lawsuit against your business can be tremendously disruptive and expensive.

You may even have been driven to consider bankruptcy because the lawsuit is not going well for you. Or you may simply have run out of money to fight it. You may also be confronted by a looming deadline or event in the litigation—such as the trial—which if it goes badly could seriously harm you and your business.

Be aware that the moment you file a bankruptcy case—under either Chapter 7 or 13—the “automatic stay” immediately stops virtually all actions of your creditors and claimants against you.

This includes stopping any kinds of ongoing collection action against you, such as an lawsuit in process.

Bankruptcy also stops virtually all new collection action, such as the filing of a new lawsuit.

This “automatic stay” is imposed immediately upon the filing of your case. Your creditors or claimants do not have the ability to prevent it from being imposed. As a result, your adversary must at least temporarily halt the litigation process.

Although he or she can then file a motion with the bankruptcy court for permission to resume the lawsuit, often there are no legitimate grounds to do so and the lawsuit goes away.

Discharge of Debt

Most debts or claims against you that you want to discharge when you file bankruptcy will in fact be discharged. (See the previous blog post for information on the relatively unusual types of debts that may not be discharged.) There is no point for a creditor who has sued you, or is threatening to do so, to ask the bankruptcy court for permission to continue or start a lawsuit if the underlying debt or claim is going to be discharged. The court would simply deny the motion.

Litigation Often Permanently Ends

There are limited circumstances in which a debt or claim that is the object of a lawsuit might not necessarily be discharged.

A creditor could object to the discharge of debts incurred through fraud, through embezzlement, from driving while intoxicated, or other similar bad behavior on the part of the debtor. In these limited circumstances, the bankruptcy court could give permission either for the lawsuit to continue in the court where it started, or to continue in bankruptcy court itself.

It’s urgent that you meet with a bankruptcy attorney—particularly one familiar with business litigation—to determine if the debt or claim at issue fits within the limited circumstances that it would potentially not be discharged.

Conclusion

If you or your business are in Texas, in the Dallas-Fort Worth area, and are dealing with litigation related to that business, contact me. I am Carrie Weir, a Texas bankruptcy attorney, serving the areas around Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, Royse City, Sachse, and Rowlett. Please get in touch with me for a free and confidential consultation. Call 972-772-3083 or use the contact form here.